Here’s where calculating the cost of customer acquisition gets tricky. As with all SaaS metrics, there’s no governing body that dictates how to calculate it. Unlike GAAP financials, no standards board provides guidance on exactly what gets included in the calculation of CAC and what doesn’t.
However, there are some best practices to observe, and there are some common mistakes we’ve seen people make over the years.
CAC mistake #1: Including costs associated with existing customers
The biggest thing to remember is that CAC should only account for the costs associated with acquiring new customers.
The costs associated with maintaining existing customers or growing their usage of your product should not be included.
At Maxio, for example, we have a resource on our marketing team who is solely dedicated to marketing strategies for current customers. We’ll call her Katie because her name is Katie.
If most of Katie’s time is being spent on the customer side, it doesn’t make sense to include Katie’s salary and other employment costs in the overall Sales and Marketing spend that gets factored into CAC.
Because the cost of having Katie on the team is not associated with acquiring new customers, but rather the cost of maintaining and growing current customers, it would not be accurate to include her employment costs in the calculation.
CAC mistake # 2: Including only sales and marketing expenses
Another common mistake people make when calculating CAC is including only Sales and Marketing related expenses in their calculation.
In fact, most websites cite the formula for CAC as:
CAC = Sales and Marketing Expenses / Number of New Customers
But this is not entirely correct.
The formula should actually read:
CAC = Costs Associated with Acquiring a New Customer / Number of New Customers
The first formula for CAC paints an incomplete picture of the true costs associated with acquiring a new customer in a period of time with your marketing campaigns.
By including only sales and marketing expenses, you’re potentially leaving out other kinds of costs associated with acquiring the new customer.
Take, for example, a company that offers free trials or proof of concept of their software. That trial or PoC isn’t free. There are possibly server costs associated with hosting that customer’s trial and implementation/support costs associated with facilitating the trial.
To leave those costs out of your CAC calculation would mean painting an inaccurate picture of the actual cost of acquiring a new customer.
A clear picture of total marketing, total sales, and the amount of money spent can be tricky to calculate. Yet, understanding this as accurately as possible can help you get new potential customers.